China is a nation that loves its liquor – and that’s the good news for international drinks companies like Diageo hoping to tap into what is a potentially massive market for fine cognacs and malt whiskey in the years to come.

By Peter Foster in Beijing

Baijiu made locally in Haikou, Hainan – love of the homegrown alcohol has made it hard for Diageo’s Vodka to make inroads in China.

The bad news is that, for now at least, the Chinese love their homegrown liquor – a fiery grain spirit called baijiu (which literally translates ‘white spirit’ and to a foreigner can taste pretty much the same) – a great deal more than fancy foreign brands like Black Label or Smirnoff.

China imported just 4m cases of foreign spirits in 2009 – equating to a near-negligible 1.4pc of the global trade, according to the drinks industry’s research consultancy International Wine & Spirits Record (IWSR).

As so often with a China “growth story” it is the potential size of the prize that keeps foreign businesses interested, which perhaps explains why Jeff Chau, general manager of Diageo China, retains a glass-half-full attitude despite the still-modest sales.

“It is true that international branded spirits are still only 1pc of the total alcohol consumed in China,” he said, “but that’s why we see such massive potential here. Ninety-nine per cent of Chinese are still drinking baijiu or beer and we hope to change that.”

Diageo, like other foreign drinks companies such as Pernod Ricard, have taken a two-pronged approach to cracking China, pushing their foreign lines to urban elites, while hedging that strategy by acquiring controlling stakes in local baijiu distillers.

Its £610m purchase of liquor maker Sichuan Swellfun earlier this year is the biggest ever announced takeover of a mainland Chinese company, according to data compiled by Bloomberg.

But if Diageo is to succeed in its ambition to make China a meaningful contributor to its global revenues in the years ahead, it will have to work hard to shift Chinese cultural attitudes to drink that remain little-changed after 20 years of exposure to Western mores.

Even in Shanghai, China’s most international city, more than 95 percent of restaurant meals are washed down with the multiple toasts of throat-stripping baijiu, or for the more faint-hearted, bottles of China’s light (and to English tastes) tasteless beer.

Among Mr Chau’s key targets is China’s younger “Generation-Y” types living in major cities like Beijing, Shenzhen and Shanghai, who are less stuck in their ways and more exposed through the internet and expat communities to foreign drinking habits.

A sponsorship tie-up with Manchester United is leading the charge for Diageo’s Smirnoff brand, their best-known players looming out of posters in many of Beijing and Shanghai’s top nightclubs.

“Football is by far the most popular sport in China which is why we tied up with Manchester United to promote Smirnoff vodka. It appeals directly to the ‘Gen Y’ group who are much more open to trying new things,” explains Mr Chau.

Another key brand for Diageo is Baileys, the sickly-sweet cream liqueur, which is being targeted at women in supermarkets.

“Most women in China still drink largely at home with their friends,” adds Mr Chau, “although that is beginning to change, particularly with the younger generation who want to try spirits when they are out with their boys.”

Both Smirnoff and Bailey’s have recorded about annual growth of about 10pc a year although they were flat during 2009 as the financial crisis started to bite.

Mr Chau is, however, confident that Diageo can yet realize its China dream. “We believe that China one day will be very big,” he concludes, “but to be honest we can’t be absolutely sure when. It may take five, ten or even 20 years but we have confidence it will get there in the end.”